Reed economist sees four risks for commercial construction sector

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Although commercial construction spending in the U.S. declined in July, the economy grew 1.7% in the second quarter and there are some positive trends in the housing market, writes Bernard Markstein, Reed Construction Data’s U.S. chief economist. However, Markstein sees four economic risks that could negatively affect the commercial construction sector (in order of concern): 1) Problems  in the Euro Zone, with the focus on the risk of sovereign debt default by one  or more major European countries; 2) No  action on the approaching fiscal cliff (expiration of the Bush tax cuts at the  end of this year); 3) No action on the federal debt ceiling, and with the debt will approaching the  ceiling In early 2013, threatens to force cessation of many government  functions, and 4) The  possibility of sustained, significantly higher oil prices.

Economic Analysis

The Bureau  of Economic Analysis (BEA) reported that the U.S. economy grew 1.7% at a  seasonally adjusted annual rate (SAAR) in the second quarter, revised up from 1.5%  growth, based on its second estimate of real (inflation-adjusted) gross  domestic product (GDP) growth. This still left second quarter growth down from  the first quarter’s 2.0% increase.

The  employment report for August proved disappointing with nonfarm payroll  employment increasing only 96,000. The average increase for the last three  months is a similarly low 94,000. Although rising employment is better than  falling employment, this rate of increase is much too slow to do much more than  barely absorb new entrants into the workforce without reducing the pool of  people already unemployed. Thus, the initially surprising report that the  unemployment rate fell from 8.3% in July to 8.1% in August turned out to be due  to discouraged job seekers leaving the workforce.

Construction  spending fell in July. All three major groups—nonresidential building, heavy  engineering, and total residential—were down. As always, care must be taken not  to read too much into one month’s numbers, especially given that the data are  often revised. Even so, it is troubling that June’s numbers were revised down  rather than up. Nonetheless, all three groups were up on a year-to-date basis  over the same period last year. The large majority of the main categories that  make up these groups are also up year-to-date. Heavy engineering had the most  difficulty given cutbacks in government funding for infrastructure projects at  the federal, state, and local levels.

One positive  is new residential construction. Both new single-family and multifamily  construction spending have generally been increasing for over a year. On a  year-to-date basis, they were up 13.5% (single-family) and 15.8% (multifamily) in  July over the same period in 2011. Total residential spending fell in July due to  the improvements category, which is among the least accurate data included in  the construction spending numbers and is frequently subject to large revisions.  For example, in the most recent (August) release, improvements were revised up  $1.2 billion for May, 1.0% higher than the number reported in the July release,  and $3.9 billion for June, up 3.2% from the July release number.

Overall, housing  continues to improve, although single-family housing starts fell 6.5% in July to  502,000 (SAAR) from June’s 537,000. Despite the July reversal, the first  decline in five months, single-family starts have been at or above 460,000 for  the past nine months and above 500,000 for six of the last eight months. Indicating  a return to improvement in coming months, July single-family building permits  jumped 4.1% to 511,000, their highest level since March 2010.  Read More.

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